Will Jet.com Be Enough to Move the Needle for Wal-Mart Stores Inc?

Walmart (NYSE: WMT) shocked the retail world when it announced that it had acquired Jet.com for $3.3 billion. The deal gives the big box store access to new technology, as well as the upstart online retailer's CEO Marc Lore, who will take over the company's complete e-commerce operation.

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It's a move that makes the No. 1 physical retailer the clear No. 2 in the online space. That said, Wal-Mart was already second toAmazon.com(NASDAQ: AMZN), and this move may not actually bring it much closer to the top.

On this episode ofIndustry Focus: Consumer Goodstrilliondollars.They also cover the drivers behind the deal and the stalling momentum of Wal-Mart's previous e-commerce efforts.

A full transcript follows the video.

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    This podcast was recorded on Aug. 9, 2016.

    Vincent Shen: Previously, with Lore's older venture with Quidsi, for example, I think a really loyal shopper following that he had was among younger urban shoppers. Then with Jet.com, they've been spending, like, $20 or $25 million a month advertising. A lot of that's targeting not only millennials, but they're trying to basically generate more repeat shoppers. I think I have some data from Slice and BI Intelligence dating back to February that indicated Jet.com was having a hard time generating repeat business -- over two-thirds of their sales were coming from new customers. You mentioned the 400,000 people signing up, or essentially shopping with them, with each month. It's just interesting to kind of see that dynamic there.

    Daniel Kline: The problem they come up against is Amazon has -- and I don't know the recent number -- but it's roughly 225 million credit cards on file. However, many 63 -- something like that -- million Prime members, they don't share the numbers, so it's always a guess. They've made the process so easy that I buy on Amazon from my phone; I can buy things verbally from my Echo. As an Amazon customer, why would I switch? Because diapers are $0.02 less? I don't need diapers. Any device I was going to buy, anything, if Amazon is within the ballpark, I'm not going to shop around.

    Maybe I'll jump on Jet.com and buy a TV because it's $100 cheaper, but I'm probably not going to switch. That's a very, very difficult behavior for any new company to win over. I would think that an awful lot of Amazon customers just find it a little bit cooler to buy from Amazon than to buy from Walmart. They can be No. 2. If they're trying to be No. 2, they can be a bigger No. 2, but this is like me challenging for the heavyweight championship; it's not going to work out well.

    Shen: With all that in mind, I'm a little skeptical as you are just based on the price tag. Three hundred million dollars in cash, $30 million in Walmart stock, and I think a lot of that is going to be dedicated -- it's basically incentives for management. Three-hundred million; sorry about that.

    Kline: In stock.

    Shen: Yeah, in stock.

    Kline: And three billion in cash.

    Shen: Exactly. For Walmart, their e-commerce efforts in their physical year 2015, they were seeing some pretty strong progress. Year over year, quarterly growth was anywhere from 21% to 27%. Then the following year, so last year, in their fiscal 2016, it kind of started to fall from the high teens to below 10%. In the most-recent quarter, it came in at just 7% globally. That deceleration definitely has people concerned because it's lagging even the broad economy, where e-commerce is, I think, still growing double-digit rates every quarter.

    Kline: They need to catch up to Amazon in terms of fulfillment. If you buy anything from Amazon, it is going to show up in two days, including on Sunday. Walmart doesn't even promise that. I think they'll sell it to you for an extra price. The days when you place an order and it takes three-to-five shipping days, Amazon has created a new standard, and people have proven willing. I'll buy batteries from Amazon because I could wait 48 hours with my remote control not working. I'm not going to wait a week. That's really where Walmart has to catch up, and Jet can help with that. This will make the Walmart customer have a better experience on Walmart.com and on Jet.com after six months, a year of integration, but I don't see it winning over new business. This may help them as they lose sales in the store to their own website fulfill, and keep those customers happy. That is an important step.

    Shen: Something else that I wanted to mention, too, is I'm curious to see how they blend, how it really impacts Walmart, because I know they -- I think it's called their shipping pass where you basically pay a flat fee for the year and you get two-day shipping -- and this is really just very similar to Prime to be more competitive with Amazon with those really incredible fulfillment speeds, and how they kind of blend that with the fact that Jet.com has some of this infrastructure, some of this technology in terms of optimizing and making as cheap as possible for their shoppers and the smart cart and everything.

    Kline: That's why I say, it ultimately has to be one brand. It seems crazy to me that you would make Jet.com the online version of Walmart, so that's not going to happen. Eventually, this will become a Walmart.com powered by Jet, and then Jet will be down in the corner -- and then Jet won't exist anymore. Hopefully, they can integrate the technology because if they do, they have to get faster. Walmart has an incredible network. Amazon has its warehouses, but Walmart has a store in most of the country, something like every five miles. Their ability to ship to stores, to ship to you from a store, if they can figure that out, and obviously there's a lot of programming and algorithms, we've talked before about how Amazon knows what you're going to buy in a local warehouse before you order it. If Walmart can figure that out and Jet helps them, then maybe they bridge some of that shipping divide, and that will at least stop them from bleeding customers just because Amazon can get things faster.

    Shen: I have to say, I just have to admit that I'm a little curious, too, to see you have this small upstart company just hitting about $1 billion in their gross merchandise volume in their first, they've launched July 2015, so just about a year of existence, has Amazon kind of paying attention, at the very least. Walmart jumps in -- huge resources. I'm really curious to see where things go even if the price tag may be a little high. Maybe hopes are a little too high; but overall, definitely an interesting deal.

    Kline: It's definitely possible that this gets Walmart back on the growth path from ramping down to ramping up, but I think Amazon is watching this and laughing. This is not a competitor. This is my little league team challenging the Red Sox. It's not going to do that, but they can become a better No. 2. The other thing they can do is crowd out some of the other players. If I'm Amazon, I'm not worried. If I'm Target, I'm a little bit nervous. If I'm Kohl's, maybe I'm nervous. This is sort of Walmart saying, "We're in second place, let's consolidate." And almost any price is worth it to do that.

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